Insolvency and Bankruptcy Code, 2016 (IBC)
Overview
In India, the legal and institutional machinery for dealing with debt default
was not in line with global standards. The recovery action by creditors, through
various laws has not been able to aid recovery for lenders nor aid restructuring
of firms. The objective of IBC is to promote entrepreneurship, availability of
credit, and balance the interests of all stakeholders by consolidating and
amending the laws relating to reorganisation and insolvency resolution of
corporate persons, partnership firms and individuals in a time bound manner and
for maximisation of value of assets of such persons and matters connected
therewith or incidental thereto.
IBC is a bankruptcy law which seeks to consolidate and amend among others the
following legislative framework relating to reorganisation and insolvency
resolution of corporate persons, partnership firms and individuals:
- Recovery of Debts due to Banks and Financial Institutions Act, 1993
- Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002
- Sick Industrial Companies (Special Provisions) Act, 1985 ('SICA')
repealed
- Winding up provisions of the Companies Act, 1956, Companies Act, 2013
and LLP Act, 2013
- The Presidential Towns Insolvency Act, 1909
- Provincial Insolvency Act, 1920
The legal framework contains a set of Rules and Regulations framed under this
Act. The legal framework is still in its nascent stage. The Insolvency and
Bankruptcy Board of India was established on October 1, 2016 as the regulator.
Salient features
- Applies to Companies, Partnerships, LLPs, Individuals and any other body
specified by the Central Government.
- Also applies to personal guarantors to corporate debtors; partnership
firms and proprietorship firms; and individuals (other than personal
guarantors). [Insolvency and Bankruptcy Code (Amendment) Act, 2017]
- Provides for clear, coherent and speedy process for early identification
of financial distress and resolution of companies and limited liability
entities if the underlying business is found to be viable.
- Two distinct processes for resolution of individuals, namely-"Fresh
Start" and "Insolvency Resolution".
- Four pillared institutional infrastructure:-
- Insolvency Professionals (IPs') – the resolution processes will be
conducted by licensed IPs. They would play a key role in the efficient
working of the bankruptcy process. They would be regulated by
'Insolvency Professional Agencies (IPA).The Insolvency and Bankruptcy
Board of India ('IBBI') has recently notified the Model by laws and
Governing body of IPAs. As per recently notified regulations,
not-for-profit companies having a minimum net worth of ₹10 crore will be
eligible to act as an IPA. IBC has become operational with IPAs getting
registered.
- Information Utilities ('IUs')– IUs will be established to collect,
collate and disseminate financial information to facilitate insolvency
resolution. This would eliminate delays and disputes about facts when
default does take place.
- National Company Law Tribunal (NCLT) – it will be the forum where
companies insolvency will be heard and Debt Recovery Tribunal (DRT) will
be the forum where individual and firms insolvencies will be heard.
These institutions, along with their appellate bodies, viz., NCLAT and
DRATs will be adequately strengthened so as to achieve world class
functioning of the bankruptcy process.
- The Insolvency and Bankruptcy Board of India – this body will have
regulatory oversight over the IPs, IPAs and IUs.
Insolvency Resolution Process
- The Code specifies insolvency resolution processes for
companies and individuals, which will have to be completed within 180 days.
This limit may be extended to 270 days in certain circumstances. The
resolution process will involve negotiations between the debtor and
creditors to draft a resolution plan.
The essential idea of the new law is that when a firm defaults on its
debt, control shifts from the shareholders / promoters to a Committee of
Creditors, who have 180 days in which to evaluate proposals from various
players about resuscitating the company or taking it into liquidation. When
decisions are taken in a time-bound manner, there is a greater chance that
the firm can be saved as a going concern, and the productive resources of
the economy (the labour and the capital) can be put to the best use. This is
in complete departure with the experience under the SICA regime where there
were delays leading to destruction of the value of the firm.
- The IP will invite applications from Resolution
Applicants for submission of resolution plans. The Resolution plan may be
submitted by the applicants, either singly or jointly. The resolution
applicant is required to fulfil such criteria as may be determined by the IP
with the approval of the Committee of Creditors, depending upon the
complexity and scale of operations of the business of the corporate debtor,
and such other conditions as may be specified by the Board. [Insolvency and
Bankruptcy Code (Amendment) Act, 2017].
- A person shall not be eligible to submit a resolution plan if such
person or any other person acting jointly or in concert with such person
does not meet the conditions specified under section 29A the Act.
[Insolvency and Bankruptcy Code (Amendment) Act, 2017].
- The process will end under two circumstances, (i) when the creditors
decide to evolve a resolution plan or sell the assets of the debtor, or (ii)
the 180-day time period for negotiations has come to an end. In case a plan
cannot be negotiated upon during the time limit, the assets of the debtor
will be sold to repay his outstanding dues. The proceeds from the sale of
assets will be distributed based on an order of priority. The assets cannot
be sold to a person not eligible to be a resolution applicant. [Proviso to
section 35 inserted videInsolvency and Bankruptcy Code (Amendment)
Act, 2017].
- The assets will be distributed in the following order, in case of
liquidation: (i) fees of insolvency professional and costs related to the
resolution process, (ii) workmen's dues and secured creditors, (iii)
employee wages, (iv)unsecured creditors, (v) government dues and remaining
secured creditors (any remaining debt if they enforce their collateral)(vi)
any remaining debt, and (vii) shareholders.
- For cross border insolvency, the Central Government may enter into
agreements with other countries to enforce provisions of the Code. (Cross
border insolvency relates to an insolvent debtor who has assets abroad).
There is a general penalty of minimum ₹ 1 lakh and maximum
₹ 20 lakh for offences or violations for which there is no penalty or
punishment prescribed under the Code. [Insolvency and Bankruptcy Code
(Amendment) Act, 2017]
The Insolvency and Bankruptcy Code is thus a comprehensive and systemic
reform, which will give a quantum leap to the functioning of the credit
market. It would take India from having among relatively weak insolvency
regimes to providing businesses a stronger framework. It lays the
foundations for the development of the corporate bond market, which would
finance the infrastructure projects of the future. The passing of this Code
and implementation of the same will give a big boost to ease of doing
business in India.
Report of the Insolvency Law Committee dated
26-3-2018
Insolvency Law Committee set up in November 2017 presented its report to the
Government on views and issues arising from implementation of the Insolvency and
Bankruptcy Code, 2016. The key recommendations of the Report are as follows:
- In recognition of the importance of Micro, Small and Medium Enterprises
(MSMEs) to the Indian economy and the unique challenges faced by them, it
has been recommended to allow the Central Government to exempt MSMEs from
application of certain provisions of the Code;
- In order to address the problem of unintended exclusions under section
29A that disqualifies certain persons from submitting resolution plans under
the Code, it has been recommended to streamline it so that only those who
contributed to defaults of the company or are otherwise undesirable are
rendered ineligible. Moreover, being mindful of the Non-Performing Asset (NPA)
crisis in the country, the need to encourage the market for NPAs was felt
and accordingly several carve-outs from section 29A have been recommended
for pure play financial entities. In order to prevent retrospective
application of any proposed change, it has been recommended to add a proviso
that the amendments shall be applicable to resolution applicants that have
not submitted resolution plans as on date of coming into force of the said
amendment;
- It has been recommended that home buyers should be treated as financial
creditors owing to the unique nature of financing in real estate projects
and the treatment
of home buyers by the Hon'ble Supreme Court in ongoing cases.
- To clear the confusion regarding treatment of assets of guarantors of
the corporate debtor vis-à-vis the moratorium on the assets of the corporate
debtor, it has been recommended to clarify by way of an explanation that all
assets of such guarantors to the corporate debtor
shall be outside scope of moratorium imposed under the Code;
- In order to fulfil the stated objective of the Code i.e. to promote
resolution, it has been recommended to re-calibrate voting threshold for
various decisions of the committee of creditors;
- In order to enable the corporate debtor to continue as a going concern
while undergoing Corporate Insolvency Resolution Process (CIRP) it has been
recommended to empower the NCLT on the application of IP to allow expansion
of the scope of essential goods and services beyond what is specified in
CIRP Regulations;
- In order to cater to exceptional circumstances warranting withdrawal of
an application for CIRP post-admission, it has been recommended to allow
such exit provided the Committee of Creditors approves such action by ninety
per cent of voting share;
- In order to prevent misuse of section 10 of the Code, which permits
initiation of CIRP by Corporate Applicant, it has been recommended to
provide for the requirement of special resolution passed by the shareholders
of the Corporate debtor or resolution passed by at least three-fourths of
the total number of partners of the corporate debtor as the case may be;
- In order to facilitate successful implementation of the resolution plan
by the successful bidder, it has been proposed to allow one year time to
obtain necessary statutory clearances from Central, State and other
authorities or such time as specified in the relevant law, whichever is
later.
- Recommendations for cases of cross border insolvency will be provided
separately by the Committee.
How to be an Insolvency Professional
Chartered Accountants with 10 years plus experience is eligible to be
Insolvency Professional (IP). One need to Pass Limited Insolvency Exam conducted
by National Institute of Securities Market (NISM).
Web sites for further information
Insolvency and Bankruptcy Board of India |
www.ibbi.gov.in |
Indian Institute of Insolvency Professionals of ICAI |
www.iiipicai.in |
National Institute of Securites Market (NISM) |
www.nism.ac.in |
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